The Economic Crime (Transparency and Enforcement) Act 2022

The Economic Crime (Transparency and Enforcement) Act 2022

March 25, 2022, Covington Alert

The Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”) received Royal Assent on 15 March 2022. The Act introduces a register for overseas entities and their beneficial owners holding land and property in the UK (the “Overseas Register”) and also includes reforms to the UK’s unexplained wealth orders and economic sanctions regimes.

The measures form part of wider transparency and corporate compliance reforms on-going, and having potential impact on companies and individuals doing business in the UK.

A regime for the registration of beneficial ownership in relation to property has been mooted for some time following the introduction of the register of persons with significant control (“PSCs”) for UK companies and other entities in 2016. A renewed impetus for these measures has emerged as a result of Russian military action in Ukraine, and the UK Government’s desire to introduce a package of sanctions and other measures targeting the Russian Government and connected persons.

The disclosure of property ownership information has to date been relatively limited as HM Land Registry’s property register only shows the legal owner of the land. In some cases, a restriction indicating that there is a trust (and therefore split legal and beneficial ownership warranting further investigation) is entered on the register, but this is not compulsory. The Act changes that, with an overhaul of the registration process and the imposition of a mandatory, retrospective, registration requirement for the beneficial ownership of land.

Requirement to Register

In essence, pursuant to the Overseas Register, overseas entities will be required to register details of their beneficial owners on the Overseas Register if they have any qualifying interests in land (unless exempt).

Overseas entities are any entities governed by laws outside of the UK. The Secretary of State can exempt a person from the registration requirement though only where doing so is necessary for national security interests or to prevent or detect serious crime. The overwhelming majority of overseas entities will therefore need to register and provide full details of their registrable beneficial owners if they hold qualifying land. There are also some other exemptions against registration for beneficial owners, but this is broadly only in relation to duplication, i.e. where the interest is indirect and there are already disclosure requirements for those intervening entities.

Qualifying land interests in England and Wales broadly align with the land interests that are registrable at HM Land Registry, comprising freeholds and leases of more than seven years duration. There are similar provisions for property interests in the rest of the UK.

The definition of beneficial ownership is very similar to that imposed for the PSC register. As such, beneficial interests will be registrable where an interest is held, directly or indirectly, in greater than 25 percent of the shares or voting rights of an entity, where the ability to appoint or remove a majority of the board is held, or other rights and relationships exist providing the holder(s) with significant influence or control of an entity.

Once in force, the Act, including the requirement to register on the Overseas Register, will apply with  retrospective effect as from 1 January 1999. Any entity that has registered property since that  date will be required to register on the Overseas Register, provided that the property interest is still subsisting.

Consequences of Non Compliance

Contraventions of the registration requirements under the Act are a criminal offence by both the entity and its officers, punishable by up to five years imprisonment and/or a fine.

Entities with existing qualifying land interests have six months from the date of the Act coming into force to register on the Overseas Register before these sanctions will apply. It is therefore important for overseas entities to ensure that they have registered prior to the end of this transitional period.

In addition, a restriction is to be entered onto all titles of property held by a registered overseas entity preventing the disposal of that property unless the proprietor is still registered on the Overseas Register or is exempt, or the property is being sold due to enforcement of a charge, as a result of insolvency or pursuant to a court order.

Applications to HM Land Registry to register land interests of overseas entities that are not on the Overseas Register will be refused unless the entity is exempt. The Overseas Register will be held by Companies House, working with support from the UK Land Registries.

All overseas entities should check their UK property holdings, and confirm whether they have any qualifying land interests, as soon as possible. Once the Act is in force they should apply to be included on the Overseas Register before entering into agreements in respect of any additional qualifying UK land, and, in any event, before the end of the transitional period if they already hold qualifying interests.

The Act also reforms the unexplained wealth order (“UWO”) regime, which was introduced by the Criminal Finances Act 2017.

Where there are reasonable grounds to suspect that a politically exposed person or a person involved in serious crime holds property valued over £50,000, which appears disproportionate to their known lawful income, a UK law enforcement agency can apply to the High Court for a UWO.  A UWO requires the respondent to provide information about their interest in the property specified in the UWO and explain how they obtained it (including how they paid for it). Most UWOs will be accompanied by an interim freezing order to prevent the respondent disposing of the property before providing the requested information. If a respondent fails to comply with the UWO, an enforcement authority can apply to seize the relevant property.  

Following their introduction in January 2018, UWOs were expected to be a potent weapon for UK enforcement authorities in their fight against organised crime. Indeed, to secure a UWO, a law enforcement authority only needs to satisfy the civil burden of proof (on the balance of probabilities), rather than the more onerous criminal burden (beyond reasonable doubt). 

However, in practice, law enforcement authorities have secured only nine UWOs in four cases to-date, and have suffered some high-profile setbacks. No UWOs have been obtained since the end of 2019 and, in June 2020, in the Baker case, the National Crime Agency (“NCA”) was denied permission to appeal the discharge of UWOs over three London properties, which the NCA alleged had been acquired as a means of laundering criminal proceeds. The NCA was liable for costs of £1.5 million.

The Act seeks to enhance the UWO regime by:

• Expanding the pool of individuals who may be issued with a UWO to include a corporate respondent’s “responsible officers”, such as its directors, managers, officers, and trustees. This amendment will enable enforcement authorities to pursue UWOs in cases where property is held through complex corporate structures.
• Allowing authorities more time to review and consider material provided by a UWO respondent before the interim freezing order over the relevant property is discharged (this period can now be extended from 60 days to 186 days by court order).
• Protecting law enforcement authorities that seek UWOs from adverse costs orders—authorities will now only be required to bear a respondent’s costs where the authority has acted unreasonably, dishonestly, or improperly.
• Extending the grounds for applying for a UWO to include cases where the property has been obtained through unlawful conduct.

Law enforcement authorities will welcome these enhancements to the regime and will undoubtedly be encouraged to make full use of UWOs in future investigations. However, whether we will see a significant deployment of UWOs in the coming months and years remains to be seen. The main constraint for UK law enforcement authorities in investigating and prosecuting criminal actors in recent years has not been a scarcity of effective investigative powers, but rather a scarcity of resources. 

The Act also includes provisions that amend rules concerning the rules governing the UK’s economic sanctions regime to strengthen the enforcement powers of the UK Office of Financial Sanctions Implementation (“OFSI”) by granting it the power to impose civil financial penalties for sanctions breaches on a strict liability basis; and, to allow for persons to be designated as sanctioned under UK sanctions legislation more quickly where they have already been sanctioned by the U.S., EU, Australia or Canada. Further details on these and all other recent UK, EU and U.S. sanctions and trade controls developments relating to Russian military action in Ukraine can be found among Covington’s Ukraine Crisis Resources.

The Act is expected to be followed by further measures concerning the holding of assets and doing business in the UK. Since 2020, the UK Government has been developing and consulting upon proposals to expand the operations and powers of Companies House, the UK’s corporate registry. On 28 February 2022, the UK Government published a White Paper on Corporate Transparency and Register Reform, providing a more fulsome outline of its proposals which, when implemented, are expected to be the most significant update to UK company law in more than a decade.

The White Paper proposals indicate that the role of Companies House will be changed, from repository for corporate records towards holding powers akin to a regulator, at least in some respects. In particular, Companies House is expected to be given new powers to challenge, and where appropriate remove, information on a company’s register that appears incorrect, based upon anomalies or through discrepancy with other public records. This power of enquiry is intended to improve the quality of information appearing on a company’s register and as available to the UK business community as a whole, and comes with new obligation for the registrar to promote and maintain the integrity of the companies register. Companies House will also be empowered to engage in greater information sharing with other UK bodies and agencies regarding the information it holds about companies.

For those persons setting up and running companies in the UK, as directors, secretaries and/or PSCs, a new requirement is proposed under which such individuals will have to verify their identity with Companies House as part of holding those positions. There will also be improved rules for protecting personal information about such individuals appearing on the register, including sensitive addresses. The reforms to UK company law will also update the requirements for the filing of company accounts, which will need to be submitted in Inline Extensible Business Reporting Language (iXBRL) format and fully tagged.

Covington will be monitoring these developments and providing updates as changes to the UK corporate landscape are taken forward.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Real Estate, White Collar and Corporate practices.